Based on what? Determining Cost

By Joel Dresang
and Chris Evers

Since 2011, federal regulations have made it easier for investors to determine their cost basis in securities they sell. But the new rules – to include cost basis information on investors’ 1099 tax statements – apply only to securities first acquired since 2011.

For investments made earlier, it’s still up to investors to find out the starting cost from which they calculate their net gain or loss.

In almost all cases, if you bought securities – stocks, bonds or mutual funds – through Landaas & Company, associates at Landaas & Company can provide you the cost basis as well as the adjusted basis needed to figure gains or losses for taxes.

For securities acquired elsewhere – especially when investors haven’t kept good records, tracking down how much you paid for a security can get complicated.

During tax preparation season, in particular, financial professionals frequently hear from investors hoping to learn the cost of an asset for which they have no paperwork.

“You should have it, but if you don’t have it, do the best you can,” says Brian Kilb, executive vice president and chief operating officer at Landaas & Company. “Figure out about when you bought it and what you paid and do the math.”

You need to know cost basis to figure out the tax consequences of selling an investment. It’s also handy for keeping track of how your investments are faring.

Determining the cost basis of an asset sometimes requires professional accounting advice. The Internal Revenue Service has several publications offering some assistance. For more common situations, here are some general guidelines.

Best-case scenario

You’re most fortunate maintaining good records that document not only how much the securities cost when acquired but also any intervening so-called capital changes – such as stock splits, stock dividend reinvestments, spinoffs or mergers – all of which can affect the cost.

Inheritances

If you receive securities through someone’s estate or as a beneficiary of a non-retirement account, you can base the cost of stocks on the average trading price the day that person died. Use the Internet or public library resources – such as stock trading tables from old newspapers – to learn the high and low market prices that day and then average the two prices to determine the fair market value as your cost basis. Some online sites, such as Yahoo! Finance, offer historical prices for some securities. Determine the cost of inherited mutual fund shares by the closing price on the day the person died.

Gifts

Securities from living donors assume the givers’ cost basis. Again, good records are a blessing. Otherwise, you need to try working with the donor’s investment broker to try to establish when and at what prices securities were attained. You’ll also need to find out about intervening stock splits and so on.

Defunct securities

If you have shares in an asset that no longer trades, do library or Internet research to find out what happened. If there was a takeover, the new company’s investor relations office or the transfer agent appointed to maintain records might provide some help. If the company went out of business, check with your state’s unclaimed property office to see whether some proceeds might be attached to the security.

Hindsight is clear, but the bottom line is to keep documents on assets you acquire from the get-go. It ends up being a lot easier than trying to play financial detective after the fact.

Joel Dresang is vice president of communications at Landaas & Company.

Chris Evers is a registered representative and associate at Landaas & Company.

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